A Way for Netflix to Add to Its Bottom Line: Include Theaters in the Mix (Guest Column)

Variety — John Fithian

Is it possible to disrupt yourself? That’s a question that’s been on my mind a lot as Netflix, hoping to court filmmakers and garner awards recognition for them, has stumbled, reluctantly, haltingly into exclusive theatrical distribution.

Film festivals and the streaming company have traded barbs, Netflix has suggested that movie theaters are killing cinema, pundits have declared that the three-week window for “Roma” in theaters is a game-changer (a claim that’s hard to imagine, when 99.7% of screens aren’t playing it in the U.S.), reporters have asked whether Netflix is killing independent film.

Alfonso Cuarón, backstage at the Golden Globes after receiving two awards for his justly acclaimed film, understandably found the controversy frustrating.

“I just [think] the discussion between Netflix and platforms in general should be over,” he said. “I think those guys, platforms and theatrical, should [get] together and just realize that whatever they are doing to this discussion is hurting cinema.

“My question to you is, how many theaters did you think that a Mexican film in black and white, in Spanish and Mixteco, that is a drama without stars — how big did you think it would be as a conventional theatrical release?

“It was not a cosmetic release. … the movie opened more than a month ago and is still playing. That is rare for a foreign film. Why don’t you take the list of foreign films this year and compare the theatrical release to those things and for how long they’ve been playing.”

Mr. Cuarón’s questions are good ones, and deserve an answer, though perhaps his criteria on the first one are a bit too restrictive. And I would ask a question in return: How many of those films were directed by Alfonso Cuarón?

But to his first question, regarding the number of theaters that might screen a film like “Roma,” I’d suggest a near analogue. “Ida,” directed by Poland’s Pawel Pawlikowski, in Polish, shot in black and white, won the Oscar for foreign language film in 2015. It was released in May 2014 and played for 53 weeks in theaters — 137 at its widest release, comparable to “Roma’s” footprint — and grossed $3.8 million. It had a release window of 130 days. It began an 18-month streaming run on Netflix in November 2014 and no doubt saw an increase in viewership there when it won the Oscar. We can only guess at that of course, because Netflix doesn’t generally release data.

And Mr. Pawlikowski’s latest film will serve as a partial answer to the second question, regarding length of theatrical engagement. “Cold War” was released the week after “Roma” debuted on Netflix, is in theaters now, distributed by Amazon, and is Poland’s official Oscar entry for foreign language film. It, too, is in Polish, and is again in black and white. Amazon intends to broaden the release throughout the award season and has not set a date for when it will reach Amazon’s streaming service.

And that is the crux of what this debate is about. Foreign films, independent films and even films with more commercial potential are finding it difficult to get theatrical runs or even get made because the numbers don’t pencil out. Netflix is doing a service to the industry by buying or financing some films that might not otherwise be made. We applaud them for it. No doubt Netflix believes that those costs can be recouped by increasing subscribers or retaining them by satisfying them with product flow.

Yet some of those titles are by directors, like Alfonso Cuarón, who are passionately interested in a theatrical run. And many exhibitors would like to give those important filmmakers a real and exclusive theatrical run before their movies stream.

Amid the growing buzz at the Toronto International Film Festival of Netflix considering exclusive theatrical releases for “Roma” and a few other titles, I welcomed the possibility, saying at the festival, “The movie theater door is open” to Netflix, but noting that the company needed to respect the business model that theaters operate under.

In order to accommodate those filmmakers, Netflix broke with precedent and its avowed business model to offer some of them limited exclusive runs in theaters; this just two weeks after reaffirming in its Q3 shareholders letter that it was committed to simultaneous release of its theatrical titles. So, clearly, Netflix understands that for some titles, theatrical exclusivity is beneficial. But Netflix’s artificial three-week window unnecessarily hobbled the theatrical potential of “Roma” and failed to attract the interest of most movie theater owners.

It is important to understand why the vast majority of theater owners weren’t interested. While studies have shown that the most active home streamers are also the most frequent moviegoers, that does not mean that a simultaneous, or near-simultaneous release doesn’t suppress the theatrical potential of a particular title. On the contrary, a recent study from Barclays emphasizes that a successful theatrical release enhances consumers’ perception of the value of a streaming title and enhances the long-term value of the film. Moviegoers make their moviegoing choices for a number of reasons: “I have already paid for it and it’s in my Netflix queue” is surely one of them. That doesn’t mean they won’t go to the theater; it means they are less likely to go to the theater to see that film. Theater owners make their booking decisions with that customer behavior in mind.

To entice some theater owners to screen the titles it buys, Netflix has reportedly “four-walled” (rented the theaters) and is rumored to have let theater owners retain all ticket revenues. This is highly unusual: In a traditional four-wall release, the distributor retains all ticket revenue. In short, Netflix bought a theatrical release, which means that not only did theater owners’ disinterest limit the release, but Netflix’s business model did too. The kind of expense that Netflix has incurred for a footprint of roughly 150 screens is not sustainable at any larger scale. It is unimaginable for a movie with greater commercial potential, like Martin Scorsese’s upcoming “The Irishman.”

What theater owners propose is neither radical nor unreasonable. If some of Netflix’s filmmakers want a theatrical release and Netflix wants to accommodate them — and not incidentally attract other filmmakers with similar interests and pedigrees — a traditional release before they go to streaming (which will obviously be exclusive to Netflix) can only be accretive. If Netflix thought “The Irishman” was worth a reported $200 million for streaming only, an exclusive and robust theatrical release would go straight to the bottom line.

What that theatrical release (and window) would look like would be agreed upon among Netflix, its filmmakers and theater owners. But it would be in Netflix’s interest to have those discussions. The company is on the brink of seeing deep-pocketed rivals entering their space who will compete for subscribers, and just as important, for filmmakers. Netflix’s content costs are going to go up, and you might think it would embrace the opportunity for increased cash flow.

In short, in its pursuit of prestige films and filmmakers, Netflix has had to turn to the theatrical space that it has too often denigrated. The manner in which Netflix can take advantage of the opportunities offered there is clear to all, and everybody can come out a winner. The theater door remains open.

John Fithian is president and CEO of the National Assn. of Theatre Owners.